Distributors are normally smaller, less credit worthy sales channels for larger corporates (e.g., Coca-Cola selling to a single family owned convenience store in Kenya, a car dealership selling Toyota cars, etc.). In Distributor or Dealer Finance, these customers receive cash advance for holding goods for re-sale from a Funder at a discount. This allows the Distributor to receive short-term cash advance for these goods so they may pay for them within the short time frame (e.g. 0-7 days) required by the the much larger supplier. Distributor finance helps to bridge the gap between the credit terms given by the manufacturer and the actual sale of goods to the end user (often a consumer). It allows the Distributor to extend their own payment terms and hold more inventory, allowing for a better match to consumer preferences, leading to increased sales for both Distributor and Seller.
Distributor finance is commonly structured through a financing agreement or facility letter between the Distributor and Funder as well as some sort of service agreement between the Seller and Funder. Distributor finance is commonly granted without recourse, meaning the rights and title to the receivables are transferred to the Funder. Distributor finance helps Distributors optimize their working capital and generally works with an assignment of rights over inventory or receivables.
In Distributor finance, the Manufacturer (or “anchor Seller”) is typically involved in various types of risk-sharing engagements with the Funder such as a first loss, stop sale or an inventory buy-back agreement.